Getting Ready to Short

"Things are going to get a lot worse before they get worse." ~ Lily Tomlin
 
I've come to the conclusion that the I need to start shorting stocks to protect our retirement and savings accounts.  In the past, I shorted some stocks while keeping my long positions. So our portfolio was still net long. This time, I plan to short stocks with 95% of our portfolio in cash.  So our portfolio may be net short this time.

I plan to short stocks with the following characteristics:

• Already in a downward trend.  Some stocks have been declining since the beginning of 2011. Unfortunately,  I know they exist since I previously owned two stocks that have declined since January :  Ford and Citibank.  I know there are others that have been declining for six months.  Other stocks have been declining since April.   Both types are worth considering for shorting. 
  
  I have learned not to short a stock that is still rise or near its peak, even if I believe it's overpriced.   Such a stock can keep rising for a while before it declines, resulting in significant losses for someone shorting the stock.
• High short interest.  Generally, people who short stocks do extensive research.   High short interest means a large number of knowledgeable people believe the stock is going down and have invested as such.  The threshold level I use for high short interest is 5%.

These stocks are already weak, and will get weaker in a downward market.  If the overall market continues to decline, stocks that meet these criteria will be my prime candidates for shorting.
 
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This is not financial or investing advice. Please consult a professional advisor.

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